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September 29, 2016

Reinvigorating the SEC, Remarks to Breaking Through Power conference

Good morning and thank you for inviting me to join you today.  I am honored to be included among all of the distinguished speakers and I am delighted to be discussing what we can do to reinvigorate the Securities and Exchange Commission, known as the SEC.

First, before we talk about reinvigorating the SEC, we need to answer some questions: What is the SEC?  Why should anyone care about it?  Does it need reinvigoration?  And, what can we do to reinvigorate it?

The SEC was created after the Great Stock Market Crash of 1929, which caused The Great Depression of the 1930s.  Its purpose was to police the capital markets, make sure investors had accurate and complete information, and go after corporations, banks and their executives that broke the law.

Basically, they were supposed to prevent the rampant fraud that caused the stock market crash in 1929 from ever happening again.

The SEC’s mission was and remains first and foremost to protect investors and markets.  This is especially important now that most of the stock market is made up of retirement accounts, such as your pension or 401k account.

The SEC is also tasked with promoting capital formation.

That’s just a fancy way of saying, they are supposed to make sure that there is enough capital – funds – available for people to buy homes, pay for an education and retire.  And for companies – small, medium and large – to have enough capital to grow, expand and hire people.

Obviously, those are really important missions.

Not only because investors should be protected, and, not only because the markets should be free of fraudsters and criminals, but because our families, businesses, economy and standard of living depend on capital.

And, the majority of that comes from our capital markets, including prominently the stock markets. 

People must have faith, trust and confidence in those markets, or they won’t invest.  Companies won’t have the capital to grow and create jobs.  And our standard of living will suffer.

The SEC’s job is to make sure that doesn’t happen.

So, the SEC job isn’t just to protect investors and markets, but also to protect your money, your savings, your retirement accounts, your standard of living, and your faith and confidence in our markets.

Now, let’s take a look at what the SEC actually does or doesn’t do to serve these goals.

Let’s start by talking about crime and punishment in corporate America, and, in particular, on Wall Street.

We have cops on the city streets and one way to think about the SEC is that they are the cops on the Wall Street beat.  So, how are they doing?

Let’s take an example from the headlines.

By now, you’ve all heard of the Wells Fargo bank scandal.  Wells Fargo is just the latest in an endless series of outrageous scandals of illegal and criminal conduct on Wall Street.

So, what is the Wells Fargo scandal all about?  What did they do?

Well, like a street criminal, they stole your money, lots of it.  But unlike the street criminal, they didn’t do it by robbing you on the street.  The people working at Wells Fargo stole your hard earned money by fraudulently opening accounts in your name and then using a computer to “charge” your accounts at the bank $25 dollars here and $25 dollars there.  Or the bank wrongly “charged” you an account overdraft fee or a bounced check fee.  They took the money from your account and put it into the bank’s account.

And, by the way, they didn’t just steal your money.  They also likely hurt your credit rating.

Banks report to credit agencies when you miss a payment, bounce a check, or overdraw your account.  So, adding insult to injury, in addition to stealing your money, Wells Fargo might well have burdened you with a bad credit score due to their illegal conduct, higher borrowing rates, and huge losses over time.

But unlike a street crime, when Wells Fargo stole your money, it wasn’t just one person at the bank stealing $25 dollars.  It was actually, thousands — and maybe tens of thousands — of people working at the bank who did the same thing or something very similar.

They took – stole — $25 dollars over and over again from lots and lots of their customers.

While the details are different, it’s important to remember that what a street criminal does when he robs someone of their money and what the bank employees did is, economically, exactly the same thing: They stole your money.  You don’t have it anymore.  They have your $25.

And, make no mistake about it: This isn’t a gray area.  This is black and white: it’s illegal criminal conduct.

On the street and in the suites.

But, what Wells Fargo did was much, much worse in many ways.

In stealing $25 here and $25 dollars there, they also: falsified deposit account information, created fictitious deposit accounts, filled out false credit card applications, created entirely new and fictitious credit card accounts with passwords and everything.

Overall, they appear to have forged millions of documents. Which also made the bank look like it had much more revenue and business activity than it did.  Which, of course, affects the stock price, our capital markets, and millions of investors who are buying and selling stocks.

Also, let’s not forget, stealing this money or forging fictitious accounts didn’t just make the bank look better.  It also made the employees look better.  Most if not all of them get performance pay.

So for every $1 dollar they steal or fictitiously create, there’s basically a split of the stolen proceeds between the bank employee and the bank.  Not only was the bank enriched, but the thousands of people at the bank doing this were personally enriched.

That’s pretty bad stuff.

But, it gets worse.

The thousands of Wells Fargo employees didn’t do this just once.  Or, even in just one year.  No.  They did this over and over for more than five years.

Think about that —- for five years, thousands and thousands of employees at a bank stole money from its customers, fraudulently created customer accounts, falsified its books and records, mislead the public, mislead investors, mislead markets, and, apparently, manipulated its stock price.

This was a one-bank crime spree of enormous proportions.

This is — roughly — what was going on at Wells Fargo, which you’ve been reading so much about.

So, what happened in the wake of this extraordinary fraud?

Unbelievably, it takes a couple years before anyone outside the bank finds out what is going on inside the bank. 

Remarkably, this massive, widespread, years-long, illegal activity involving thousands and thousands of employees was discovered and revealed not by the cops, not by the Department of Justice, not by the Securities and Exchange Commission, not by banking regulators or supervisors, not by the banks’ own management, and not by the bank’s huge internal legal, risk, audit, or compliance departments.

It was discovered and revealed by an investigative reporting team at the Los Angeles Times newspaper which publicized it in December 2013.  That’s right, almost 3 years ago.

Of course, you know what happened after this outrageous pattern of illegal conduct was splashed across the LA Times: the cops came, the Department of Justice and the FBI showed up, the SEC arrived, people were arrested, handcuffed, dragged off to jail with perp walks for the cameras.  Everyone was punished, executives’ lives were ruined, justice was done. 

I know.  Don’t laugh.  None of that happened.

In fact, NOT one of those things happened.

To this day, the SEC is nowhere to be seen.

What is the message that sends?

It’s one thing not to confirm investigations or pre-judge investigations, but the SEC Chair should be visible and vocal, letting everyone know that at all times that the SEC cops are on the Wall Street beat.  They are aware of public and nonpublic developments and the public should be confident that any matters that raise illegal conduct are going to be very thoroughly investigated.

But all the public gets from the SEC is silence.

What did happen?

Well, really nothing.

That’s a little unfair, but not by much.

Credit where credit is due, the LA District Attorney did open an investigation.  And the new Consumer Financial Protection Bureau, the CFPB, which was just created a few years ago in 2010 in the Dodd Frank financial reform law, also began investigating.  The result of those investigations?

On September 8th of this year, almost 3 years after the LA Times broke the story, it was announced that Wells Fargo settled the investigations.

What were the terms of the settlement for this egregious, flagrant criminal conduct?

Wells Fargo paid fines totaling $185 million without admitting or denying any facts or any guilt by anyone.  And, not one single individual was punished in connection with the settlement.

Now, $185 million in fines sounds like a lot of money.  And it would be to me and you.  But consider this.  Wells Fargo’s revenue in the 2rd quarter of this year was $22.2 billion.  Its income was $5.6 Billion.  That was in just three months.

Its revenue for the year will probably be around $90 billion and its earnings for the year will likely be more than $20 billion.

$185 Million is pocket change to a bank that makes more than $20 billion.  $185 million is less than 1% of the $20 billion it will earn in 2016.  It is just a cost of doing business.  And, a very small cost at that.

And, remember, not one executive or supervisor was punished.  In fact, just the opposite.

Numerous people at the bank, from the CEO on down, received performance bonuses based on the fraudulently created appearance of activity.  For example, between 2012 and 2015, the top 5 execs at Wells Fargo received more than $450 million in performance pay.

The head of the business unit, where all this criminal activity took place, who reported directly to the CEO, “retired” in July, coincidentally just weeks before the settlement was announced.  That person reportedly received a $125 million pay package going out the door.

Oh, and since the settlement revealed this massive, years’ long criminal activity, we have learned two other really important facts:

First, Wells Fargo has fired 5,300 employees over the last five years for illegal conduct in improperly charging customers — known everywhere else in the world as “stealing” — $25 dollars at a time from somewhere between hundreds of thousands to millions of customers.

And for creating fictitious deposit, debit and credit card accounts for millions more.

So not only were thousands of bank employees ripping off customers, but many others at the bank knew about it.  After all, you can’t fire 5,300 employees over a five-year period without hundreds if not thousands of other employees knowing.  And executives and supervisors had to know.  And, legal, risk and compliance had to know.

In fact, if anyone in management didn’t know that thousands of employees were being fired each year for five years, they should be fired.

A second interesting fact we’ve learned since the settlement was announced is that Wells Fargo has an “internal ethics hotline.”

But there’s been detailed reporting that employees using the hotline to report this criminal activity were fired.  There are other reports that Wells Fargo fired other employees who were whistleblowers who may or may not have used the so-called ethics hotline.  It was also reported that at least one of these employees sent an email to the CEO of Wells Fargo detailing these illegal and criminal practices.

He claims not to have received it.

He also claims not to have known about all this.  But, again, how could the CEO of a company not know that more than 5,000 employees had been fired for illegal conduct over five years?

Think about that and ask: how could Wells Fargo be treated so gently l when it stole millions of dollars and ripped off more than 2 million customer accounts?

The answer, in part, is due to a dysfunctional SEC that has lost its way, lost its focus, and lost sight of its real mission.  In fact, too much of what we are seeing at Wells Fargo highlights and illustrates so much of what is wrong at the SEC.

And, makes clear why it is so important to reinvigorate the SEC.

Before I highlight a few of the key issues raised by the Wells Fargo case about the SEC, I first want to say that the CFPB did a very good job here.  It has been the lead federal agency in investigating and fining Wells Fargo.

It is a new consumer protection agency with limited authority.  It is not the SEC or the Department of Justice, which have real authority and the duty to go after illegal and criminal conduct.  They have been AWOL in this case and too many others for years.

Nevertheless, Wall Street and its allies, particularly its political allies, have been criticizing the CFPB for not doing more and not acting more quickly.  At the same time, they ignore the dereliction of duty by the SEC, the Department of Justice and others.

With limited authority, the CFPB imposed the biggest fine in its history against Wells Fargo.  And, this is on top of a remarkable record of returning almost $12 billion to more than 27 million Americans ripped off by financial companies in just the last few years.

The Consumer Protection Finance Bureau probably has the best record ever for a new agency

Let’s contrast that record with what the Wells Fargo’s crime spree tells us about the SEC:

First, the Wells Fargo scandal shows that Wall Street, big finance and the country’s biggest corporations do not fear or respect the SEC.

Now it’s not just the SEC.  The other regulators are too often not feared or respected either—perhaps with the exception of the CFPB

But the SEC is supposed to be the front line cop on the corporate beat.  That’s their primary mission:  enforce the securities laws against corporations and their executives.

Corporations and their executives just don’t fear the law, or getting caught, or getting meaningfully punished.

How could this be? Because an indefensible double standard has been created since the financial crash of 2008.

Since the crash, not one single senior executive or supervisor at a single too-big-to-fail Wall Street bank has been punished at all for any conduct leading to the fraudulently inflated subprime bubble that caused the worst financial crash since 1929, and the worst economy since the Great Depression of the 1930s.

Better Markets did a report showing that the 2008 crash is going to cost the country more than $20 trillion.  That’s $170,000 for every woman, man and child living in the US today.

Yet, not one major executive or supervisor in finance was punished.

And, since the 2008 crash, in scandal after scandal, after illegal business practice after illegal business practice, not one single senior executive or supervisor at a single too-big-to-fail Wall Street bank was punished at all.

From illegally rigging virtually every market in the world, from Libor to foreign exchange, to the largest perjury conspiracy in the history of the country (euphemistically called “robo-signing”), no senior executives were punished.

They got to use shareholders’ money to pay fines while keeping their bonuses.

This is referred to as “too big to jail.”

What is the message this sends to the corporate suites? CRIME PAYS.

Ending that double standard and putting the law back on Wall Street and back into the corporate boardrooms must be a priority for all of us.  The SEC simply must be respected and feared again.

But, that requires reinvigorating the SEC.

A second point illustrated by the Wells Fargo scandal:  how important it is that executive compensation and incentives like bonuses be policed and clawed back when the law is broken.

We know bad incentives were one of the key drivers of the fraudulent subprime bubble that  crashed the global economy in 2008.

So when the Dodd Frank financial reform law was passed in 2010, it had a number of provisions aimed at making sure corporate pay incentives, especially at the biggest banks, didn’t again lead to reckless, illegal and criminal conduct.

The SEC and other agencies were directed to enact a rule to prohibit and police pay to make sure it didn’t happen again.

Today, on September 27, 2016, more than 6 years after the law directed them to pass such a rule, the SEC has not finalized a rule clawing back executive pay.  As a result, today there is no rule that enables the SEC to claw back the pay of the people who engaged in misconduct, including criminal conduct like that at Wells Fargo.

That is an inexcusable dereliction of duty. 

While the SEC has finalized some key Dodd Frank financial reform rules, there are many more – like the claw back rule — that haven’t been passed and need to be.

Third, why hasn’t the SEC meaningfully punished individual executives and supervisors and why hasn’t the SEC finalized all the rules? 

Because it is — too often, not always, but too often — a captured, paralyzed, politically abused agency.

The SEC hears virtually only from industry, Wall Street: their lobbyists, lawyers, trade groups, and allies, including too many in Congress, who are supposed to be YOUR elected officials.

Together, they lay siege to the SEC, day in and day out, fighting for rules and policies that advantage them.

They fight nonstop in the rulemaking process, and sue when they don’t get their way.  And  they get their allies to attack the agency and keep it underfunded.

It is so bad that often Better Markets is the only organization fighting for the public interest against the industry onslaught.   

Well, not the only one.  There’s Public Citizen, AFR, the Consumer Federation of America, some of the unions, a few professors and a few others.  But, often Better Markets is the only non-industry organization at the SEC opposing the industry.

And, making matters worse, who are industry’s lawyers and lobbyists?

Too often, they are former SEC officials and lawyers who have spun through the revolving door, taking the knowledge they gained as public servants inside the SEC and using it to benefit the private sector.  Too often this corrupts the process and has a corrupting influence on those who still work there.

Now, let me be very clear:  that isn’t everyone at the SEC or everyone who has left the SEC.  There are lots of dedicated, talented, and hard-working public servants at the SEC.  They go to work every day, often under difficult circumstances, and work for the public.  But they lack substantial political support from elected officials, especially in Congress.

But, most of all, they lack leadership — people genuinely committed to the public interest and the SEC mission, people with track records of standing up to industry and its lobbyists and allies, people who are fearlessly dedicated to protecting the public and promoting the public interest.

It’s also important to note that the SEC has done some things right.  It has finalized some important rules and completed some important financial reforms.

For example, it has set up a whistleblower protection program that appears to be working pretty well.

But too often it is an agency desperately in need of being reinvigorated.

So what do we do at Better Markets to reinvigorate the SEC?

Like the industry, we try to be there day in and day out, week in and week out, challenging the SEC on everything from policy making to rulemaking, as they propose, finalize, implement, interpret, and enforce their rules. The process takes years.

Better Markets is there throughout.

And, on enforcement policy.  We press nonstop for the SEC to meaningfully punish individuals, including in particular executives and supervisors.  It isn’t just right to punish lawbreakers, but it is also essential if future crimes are going to be deterred.

And, in litigation.  When the industry sues the agency, Better Markets goes to court to fight the industry there as well.  Sometimes, standing shoulder to shoulder with the agency, making sure the public interest gets heard and is a priority when the decisions are made.

We also act as a counterweight to the industry at the SEC. We fight their lawyers and lobbyists who are trying to bend law and policy to benefit them.  We push to make sure that the public interest is prioritized.

Importantly, we also work with many in industry whose interests would advance the public interest as well by increasing transparency, oversight, and accountability, by creating a level playing field, and by bringing new products, services and ways of doing business to the markets for the benefit of investors and the public.  Like the new IEX Investors Exchange, which is a private sector solution to fight predatory conduct in our markets.

What can you do to reinvigorate the SEC?

You must get involved to the extent you can.

We must stop letting the industry, its lawyers, lobbyists and political allies dominate the SEC and its policy making, rule making and enforcement process.

You must organize.  Raise your voices, ideally collectively.  As I said, industry too often is the only group the SEC hears from.  So, support groups like Better Markets who fight for rules and policies that prioritize the public interest.

Get pension funds and asset managers — including your mutual funds – to speak up and promote your interests at the SEC.

Cities and states across the country have pension funds.  Many of you have money in mutual funds.  Those are the investors the SEC is supposed to prioritize and protect.  But that will only happen if you are much more engaged.  You must fight for investors’ interests.

Rulemaking.  Have your organizations follow the rules the SEC is proposing.  Or watch organizations like Better Markets which constantly monitor what’s going on at the SEC.  Go to our website: and sign up for our Newsletter. 

And, comment on proposed rules.  Meet with the staff and advocate for them to do the right thing.

Be a watchdog.  Apply public pressure.  When you see the SEC doing something that you don’t agree with, you have to call them out.  Usually no one is watching but industry.  And, no one is calling them out.

As Justice Brandeis said, sunlight and attention is the best disinfectant.

Also apply political pressure.

You have to make sure elected officials support the SEC.  And fight back against the industry’s supporters.  Ask your elected officials where they stand on the SEC, including the next President who will pick the next Chair of the SEC and several commissioners.

With everything else going on, why should you or anyone get involved?

Because when the SEC fails to do its job, you pay the price.  You suffer the losses. 

Look at the 2008 financial crisis.  You lost the jobs.  The homes.  The savings.  The educations.  The retirements.  The standard of living.  $20 trillion in costs to the US alone.

Or look at Wells Fargo.  It was your savings accounts.  Checking accounts.  Credit and debit card accounts.  The stole the $25 from you.  Thousands of you.  You got hit with overdraft charges.  You got hit with bounced check charges.  Your credit rating was damaged.

We know there’s a lot going on, there are a lot of priorities and the SEC in particular can be complicated and intimidating.  That can be paralyzing.  But you don’t have to do everything.  And you shouldn’t.

Start by doing one thing, even if it’s a small thing.  Or, pick one issue.  Executive pay.  Punishing individuals.  Revolving door.  A “best interest” fiduciary duty standard.  Mandatory arbitration.

Or simply start by following the issues so that you can do more in the future.  Follow Better Markets.  Sign up for our Newsletter.  Get informed.  Then, take action.

The SEC needs to be reinvigorated.  It will not change from within.  And, it will not change from the outside unless and until many more people are engaged in making them change.  Watching them.  Challenging them.  Engaging with them.  Calling them out when they fall short.  Supporting them when they do the right thing.

Thank you for your time and attention.



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